Question

Luzadis Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The predetermined overhead rate was based on a cost formula that estimates $735,000 of total manufacturing overhead for an estimated activity level of 49,000 machine-hours.

During the year, a large quantity of furniture on the market resulted in cutting back production and a buildup of furniture in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

Machine-hours		40,000
Manufacturing overhead cost	$	693,000
Inventories at year-end:
Raw materials	$	20,000
Work in process (includes overhead applied of $60,000)	$	185,000
Finished goods (includes overhead applied of $102,000)	$	314,500
Cost of goods sold (includes overhead applied of $438,000)	$	1,350,500

Required:

1. Compute the underapplied or overapplied overhead.

2. Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate journal entry. Record the entry to close the balance in the manufacturing overhead account to the cost of goods sold account

3. Assume that the company allocates any underapplied or overapplied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry. Record the allocation of the underapplied/overapplied overhead to various accounts

4. How much higher or lower will net operating income be if the underapplied or overapplied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold? Net operating income will be #.. (greater/lesser)...if the (underapplied/overapplied) overhead is allocated rather than entirely to cost of goods sold

Answer 1

1
Predetermined overhead rate	15	=735000/49000
Overhead applied	600000	=40000*15
Manufacturing overhead cost	693000
Less: Overhead applied	600000
Underapplied overhead	93000
2
	Debit	Credit
Cost of goods sold	93000
Manufacturing overhead		93000
3
Work in process	9300		=93000/600000*60000
Finished goods	15810		=93000/600000*102000
Cost of goods sold	67890		=93000/600000*438000
Manufacturing overhead		93000
4
Difference in net operating income = 93000-67890 = $25110
Net operating income will be $25110 greater if the underapplied overhead is allocated rather than entirely to cost of goods sold